A home equity line of credit is a type of second mortgage that allows homeowners to borrow money using their home as collateral. If you have enough equity in your home and good credit, you can apply for a line of credit, and a maximum potential credit line will be set according to the lender's policies.
Unlike a standard home equity loan, a home equity line of credit (HELOC) allows you to draw money in increments, almost like a credit card. As you repay the loan amount, you can borrow again on the line of credit as long as you do not exceed the credit limit.
A home equity line of credit can be valuable if you want to borrow against your property's value for ongoing expenditures like tuition payments, elder care, recurring home improvement projects and more.
Home equity line of credit terms
A HELOC typically has a variable interest rate, usually based on a certain percentage above current prime rates. Interest is charged only on the amount actually borrowed by the homeowner rather than on the entire line of credit.
Lenders offer HELOCs at various terms ranging from five years to 20 years. These are often broken into "draw" or "access" periods followed by a "repayment" term. Once the draw period ends, you can no longer use the credit line for new borrowing, and must begin to repay any outstanding balance which remains. By the end of the repayment term, the balance must be paid in full. During the draw period, you can often choose how much to pay each month as long as you make the minimum interest payment which is due.
If you are considering a HELOC, be sure to pay attention to interest rates, because an increase in interest rates could result in an increase in your monthly payments and could cause the repayment balance to increase. Most HELOCs are based on the Prime Rate.
Home equity lines of credit are approved like any other mortgage. They're based on your creditworthiness and the available equity in your home.
Michele Lerner contributed to this answer
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.
